TALES OF THE TAPE: A Few Big Bets Maul Verizon Portfolio
02 Aug 14:00
By Christine Nuzum
Of DOW JONES NEWSWIRES
NEW YORK (Dow Jones)--Verizon Communications' (VZ) big bets forced the
company to write off half of its $5.9 billion investment portfolio in the
second quarter, and chances are that more charges are lurking as the broadband
sector meltdown continues.
While not as massive as some of the goodwill charges disclosed last month by
telecommunications equipment makers like JDS Uniphase Corp. (JDSU) and Nortel
Networks Inc. (NT), Verizon's $2.9 billion charge is substantial. It exceeds
the net charge of $2.6 billion that Microsoft Corp. (MSFT) took on its
second-quarter earnings earlier last month. Microsoft, whose market
capitalization is more than twice Verizon's, took investment losses of $3.9
billion, offset by gains of $1.3 billion. Microsoft's investment portfolio, at
$17.5 billion, was nearly three times as large Verizon's at the end of the
first quarter. It is also more diversified.
Verizon officials declined to comment on the investment strategy, but
investors and industry observers say that the company, like Microsoft and many
others, places bets on ventures that are expected to help advance its own
business into new areas. For example, Metromedia Fiber Network Inc. (MFNX), a
major Verizon investment, was viewed as the company's entry point to carry
local broadband traffic in metropolitan areas as more advanced digital services
like video-on-demand emerge.
"There is no question that it is a very large write-down that obviously can't
happen every quarter," said George Geis, a professor at the University of
California at Los Angeles' business school and author of "Digital Deals:
Strategies for Selecting and Structuring Partnerships."
"It's not illogical for a company like Verizon to make a series of big bets
to support its infrastructure needs," said Geis. "The problem has been that the
bets now have not paid off."
Analysts emphasize that Verizon's second-quarter charges don't affect the
company's cash flow, and shouldn't affect its stock price either, unless they
persist. Indeed, Verizon's stock has dipped just 95 cents, or 1.7%, since the
company reported second-quarter earnings and reduced its financial forecast
Tuesday.
"I don't think it's all that material," said Prudential Securities analyst
Floyd Greenwood about the $2.9 billion charge. "If, over time, we see a
tremendous amount of volatility or we see a trend in one direction, I think
maybe they would want to do something about it."
Stakes In Cable & Wireless, NTL, Metromedia Fiber
Verizon's investment losses during the second quarter were from the three
companies that make up the bulk of its portfolio: Cable & Wireless PLC (CWP),
NTL Inc. (NLI) and Metromedia Fiber.
Verizon's investment portfolio was valued at $5.9 billion at the end of the
first quarter. Stakes in those three companies accounted for all but $841
million in the portfolio. The remainder is distributed among several
investments including stock in Telecom New Zealand (NZT), Walt Disney Co. (DIS)
and Flag Telecom Holdings (FTHL). Verizon has other large investments in young
communications companies, including 18% of Flag Telecom's stock, and 10% of
Genuity Inc.'s (GENU) voting stock. However, unlike Verizon's stock in Cable &
Wireless, NTL and Metromedia, the stakes in Genuity and Flag are not available
for sale, and therefore, not subject to charges to earnings.
Verizon did not disclose how much of the second-quarter investment loss was
tied to each security, but during a conference call, Chief Financial Officer
Frederic Salerno said Verizon's stakes in Cable & Wireless and NTL accounted
for most of the charge.
Implying that the losses from Cable & Wireless and NTL may be temporary,
Salerno said that Verizon recorded gains on the same stocks in the second
quarter a year ago. Both investments were inherited from Bell Atlantic,which
had an investment in Cable & Wireless Communications before it merged with GTE
to form Verizon. When Cable & Wireless Communications was restructured and sold
off to Cable & Wireless PLC and NTL last year, Verizon received stock in both
companies.
At the end of the first quarter, Verizon had $2.1 billion in Cable & Wireless
stock and $1.6 billion in NTL stock. NTL's stock is down 80% since its 52-week
high of $50 last October, while Cable & Wireless has lost 70% since it touched
an year high of $56.75 last September.
While Verizon also wrote down some of the value of its Cable & Wireless stock
because of its prolonged declines, NTL is seen as the riskier investment. NTL's
cash needs are less urgent than those of Metromedia, but some investors have
worried that NTL does not have enough funds to carry it into profitability. NTL
bonds were recently quoted near 65 cents on the dollar.
Another big bet that didn't pay off was in Northpoint Communications. Verizon
agreed to put $800 million into the wholesaler of digital subscriber line, or
DSL service, last August, then retracted the commitment in December after
NorthPoint restated its third-quarter results. Verizon ended up with a
write-off of about $150 million on the investment, but now faces a $1 billion
lawsuit from Northpoint.
"Their investment strategy has certainly raised a lot of questions," said
Donna Jaegers, senior analyst at asset management company Invesco. "They
thought it would be a great idea to buy Northpoint. You don't solve a problem
by merging it with somebody who's got their own problems."
Verizon's deal with Northpoint was seen as an effort to shore up its
then-struggling DSL business. At the beginning of the year, Verizon seemed to
be showing its DSL business could thrive without NorthPoint, but since then,
all the regional Bells have fallen short of expectations in the new technology.
Chuck Thomas, a senior analyst with Dreyfus Corp., said he would like to see
Verizon make another bet on a DSL firm, now that their assets have been
devalued. For example, in March, Northpoint sold nearly all its assets to AT&T
Corp. (T) for $135 million, a far cry from the sum Verizon bid for a stake in
the company seven months earlier.
Metromedia Fiber Seen As Riskiest Bet
More charges may be lurking in Metromedia, which is currently viewed as
Verizon's riskiest investment. In March 2000, Verizon invested $975 million in
Metromedia's convertible bonds and $715 million in its common stock. During the
fourth quarter of last year and the first quarter of this year, Verizon wrote
off $356 million of the convertible bond investment. Verizon has not disclosed
how much of the $1.3 billion in Metromedia that remained on its balance sheet
at the end of the first quarter was in the recent write-off.
Metromedia announced Wednesday that its deadline to secure funding
commitments for a credit facility was extended to Aug. 15. Metromedia has
secured commitments for $180 million of the $287.5 million originally required
for the credit facility, but under the extended deadline, the company must
raise an additional $200 million in vendor financing. The news has encouraged
investors in Metromedia's debt about the company's prospects for survival.
According to Bonds Online, Metromedia corporate bonds recently traded at 32
cents to 34 cents on the dollar. The bonds are still at distressed levels, but
up from 28 cents to 29 cents, where they had traded for the last week.
"They made a big bet on MFN," said Thomas, of Dreyfus, which has $5.7 billion
in Verizon stock, according to Thomson Financial/Carson, "and the fact that a
major local service provider couldn't make that work ... is indicative of the
challenges that these (startup) companies face."
-Christine Nuzum; Dow Jones Newswires; 201-938-5172
(END) DOW JONES NEWS 08-02-01
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